Exploring The Depths Of The Stock Market

"I wonder if the market will be like the Bears," the chief investment officer for Chicago's Acorn Investment Trust mused. "Lead in the first half and give it all back in the second half."

In fact, the 1998 stock market already has staged a typical Bears game. Ending the year at 7908, the closing Dow Jones industrial average climbed to a record high of nearly 9338 on July 17 and then took the gas, plunging to 7539 on Aug. 31.

But the year has three months to go--the whistle starting the fourth quarter blew last week.

Unfortunately, the players as well as the prognosticators in the broadcast booth are unnerved by the fact that there's an earthquake under way on the playing field.

Financial calamities in Asia, spilling into Latin America and beyond, have damaged severely the complacency U.S. investors felt toward the U.S. economy and their own investments.

In turn, President Clinton's problems and a debacle at a private investment firm, Long-Term Capital Management, have made overseas investors question their recent love affair with U.S. stocks.

In this environment of heightened uncertainty, stocks have gyrated wildly, bringing the average intraday trading range on the Dow Jones industrial average to more than 230 points over the 30 sessions through Friday--unheard of market volatility.

"Investors over the last three years or so had become conditioned to the market providing vindication in a rather quick fashion," said Gregory Nie, technical market analyst at Chicago-based Everen Securities. "Your convictions were not tested all that much. Now, the volatility issue is equally important if not more important than the market's direction. When you approach the market, your convictions are going to be tested."

Analysts who follow stock chart patterns often point to a "double-bottom" as a bullish sign that stocks have sunk, rallied and sunk again, setting the stage of a sustainable recovery.

"More times than not, the market will provide you with a testing process," said Alan Shaw, technical market analyst at Salomon Smith Barney. Having fallen to 7400 the morning of Sept. 1, the Dow industrials may have to revisit or break below that figure before the worst is over, according to the double-bottom image.

"That is a typical pattern," Nie said. "You make a low and then you successfully test the lows. It's a chart sign that the buyers are coming back into the market and are now gathering force relative to the sellers."

Investors braced for the possibility that stocks will plunge in October, as they have before, may take perverse comfort in the hope that a second powerful wave of selling might be the last.

Don't bet on it, say technicians. The rule book has been thrown out.

"I don't think the individual investor should worry about double bottoms," said Alfred Goldman, technical market analyst at A.G. Edwards in St. Louis. "It's a classic, pure technical term. I don't take any of them seriously."

Nie agreed: "In this environment, volatility is going to overrun that. The volatility genie is completely out of the bottle, and I don't perceive that investors have fully grasped its implications. That's not necessarily bullish or bearish. I don't feel we're crossed the line yet from a primary bull (market) to a primary bear.

"On an intermediate-term basis--a few months--I think investors should be prepared for a range as wide on the extreme as 6400 to 9400," Nie said. "That's my crude attempt to quantify the volatility level in this market. You have to expect wider swings. A conventional 10 percent stop-loss (a standing order to sell when a stock drops by 10 percent) may not be appropriate for a market with this type of volatility."

"We're on the other side of greed; we're in the fear zone," Goldman said. "The market always overdoes everything. We think our economy is doing well, despite problems abroad. The bright side of this very severe correction is that it's creating outstanding opportunities.

"The best time to buy stocks is when it's most uncomfortable buying stocks, and the worst time to buy them is when it's most comfortable," Goldman said. "I don't know anyone who's comfortable."

Goldman sees a fairly quick rebound, after the third-quarter corporate earnings season is over. But there is another view.

"Even if we were to assume that the lows of August and early September were going to be the lows, there's enough damage that has been done where you could be backing and filling well into 1999," Shaw said.

"The market is no different than a human being: If I come up and give you a tap on the arm, you're probably still going to be able to go out and play tennis this afternoon. But if I come up and give you a real slam, you're going to have an ache for a while that's going to take a few days before you're ready to go back out on the court.